BLOCK EXEMPTIONS AND ITS NECESSITY IN INDIA BY - KIRAN S

BLOCK EXEMPTIONS AND ITS NECESSITY IN INDIA

AUTHORED BY - KIRAN S

Abstract: -

The World Intellectual Property Organization’s Global Innovation Index 2022 ranks India at the 40th position, among 132 economies. India also ranks at the 63rd position in the Ease of Doing Business index, released by the World Bank. This shows the country's determination to economic growth and overall development in all economic sectors. On this light, this article delves into the concept of block exemptions, prevailing in the United Kingdom and the European Union, and provides a detailed analysis of the various provisions, providing a comprehensive overview of the concept. The article also highlights a few block exemption orders, and landmark judgements, to aid in better understanding of the concept. The article culminates with an analysis of Indian provisions pertaining to the same concept and suggests the implementation of the block exemptions concept.

Keywords: - Exempt agreements, block exemptions, Office of Fair Trading, Secretary of State

Introduction: -

The need for legislations focusing on regulating competition was seen in the post-globalized world. Governments across the world made it their responsibility to ensure that both small and large firms had a level-playing ground to engage in their economic activities. The United States of America can be considered the pioneer of regulating competition, as they passed the Sherman Act in 1890, the Clayton Act and the Federal Trade Commission Act in 1914. The United Kingdom also brought in the Competition Act in 1998 along with the Enterprise Act in 2002. India also scrapped off its earlier Monopolies and Restrictive Trade Practices Act in 1969 and enacted the Competition Act, 2002. This article has its major focus on exempt agreements and block exemptions, as given under the Competition Act 1998, (hereinafter referred to as ‘Act’) and the requirement of such concepts in the Indian Competition Act, 2002. ‘

Exempt Agreements: -

Exempt Agreements refer to those agreements which, on application made to the Office of Fair Trading (OFT) in the UK, get exempted from Chapter I provisions of the Act. Exemptions are primarily given to both vertical and horizontal agreements which may focus on developing new technologies or improvements on a preexisting product, if the consumer also gets a fair share of the profits that the enterprise gains from the exemption so received. Section 4[1] of the Act lays down the conditions for getting an agreement exempted. It explains that the agreement must be one to which Section 9 of the Act applies to, or a request for exemption is made. Once the OFT is satisfied with the agreement, it may declare the agreement exempt from the provisions of Chapter I of the Act, for a duration that is specified clearly in the request, or as the OFT declares it to be for. It may extend the exemption, but only in specific circumstances.

Section 9[2] of the Act states the kinds of agreements that can be exempted. Agreements which contribute to improving distribution or production or those which promote economic or technical progress, which allows consumers to receive a fair share of the ensuing benefit are eligible for exemption. Moreover, such agreements must not impose restrictions on the parties which are not manifestly necessary for the fulfillment of those objective or give the parties a possibility of elimination of competition with respect to considerable part of the products in question.

Section 5[3] lays down the circumstances under which an individual exemption can be cancelled. It explains that if the OFT has one or more reasonable grounds to believe that there has been a change of circumstance which is material, since it granted an individual exemption, it may cancel the exemption, vary, or remove any obligation or condition, or impose one or more obligations or conditions. It can also cancel exemptions if it is found that the exemption was received through incomplete information, fraud, or misleading information. Other scenarios in which the OFT can cancel exemptions include breach of material condition, and failure to comply with an obligation. The provision also gives the OFT powers to cancel exemptions suo motu or if an application is made requesting the same.

The provisions pertaining to both individual and block exemptions  in the Act are inspired by the European Treaty of Rome which was signed in March 1957. Under Article 85(3)[4] of the Treaty, the provisions pertaining to anti-competitive practices, mentioned in Paragraph 1 shall be declared inapplicable, for any agreements or class of agreements, any decisions or class of decisions between associations of enterprises or any concerted practices or class of concerted practices which aim at promoting technical or scientific progress, while providing consumers a fair share of the benefit, and also does not impose any unreasonable restrictions on either party, or remove a substantial portion of competition with respect to such portion of products. As evident, the UK provision is lifted off verbatim from the Treaty of Rome.

Block Exemptions: -

Block exemptions refer to a bunch of agreements, which in the opinion of the Competition and Markets Authority of the UK, are likely to receive Chapter I exemptions. It may notify the Secretary of State to make an order to exempt these agreements. Upon receipt of such recommendation the Secretary of State gives effect to it with modifications, if necessary. Section 6[5] of the Act provides in detail the various conditions under which a block exemption takes effect. It explains that an order may impose conditions such as that a breach of condition given in the order can result in cancellation of the block exemption, with respect to that agreement. Failure to comply with obligations imposed by the CMA would also have a similar effect. The CMA also can cancel block exemption for an agreement if it considers that the agreement is not an exempt agreement under Section 9.

Section 7[6] of the Act lays down the method by which the OFT may oppose the inclusion of an agreement in a block exemption. The Secretary of State, while giving an order effecting a block exemption, may find an agreement that does not meet the criteria for the block exemption, but meets other requirements. In such circumstances, it may notify the OFT regarding the same. The OFT on receipt of such notice, should give its opposition in writing to the concerned party before the end of the notice period. If the OFT does not oppose the agreement within the period of notice, such agreement is deemed to be falling within the block exemption.

Section 8[7] explains the procedure for giving a block exemption order. Firstly, the CMA must bring notice of its recommendation in the way it feels most suitable to the parties likely to be affected by it, in order for them to make any representations about the same. Secondly, the Secretary of State must bring to the attention of the CMA any modifications made to the order and take its comments regarding such modifications. Thirdly, if the CMA opines that it is necessary to vary or revoke an order, it may make a recommendation of the same to the Secretary of State. If no such recommendations are made, the Secretary must inform the CMA of any proposed variation or revocations by their office, and consider any comments made by the CMA.

Public Transport Ticketing Schemes Block Exemption[8]: -

This block exemption order can be taken as an example as to the overall working of the concept in the UK. The order was given effect to in 2001 and amended in 2005. The order aims to provide a block exemption to public transport ticketing schemes, which are written agreements between operators that allow passengers to purchase tickets that can be used on the services of all participating operators. Such schemes are necessary, as consumers would then have to buy tickets each time they availed of the services of a different operator. In the UK, the public transport system runs jointly by both municipal and private players, and the exemption ensures that the benefit of new technology, which is usually brought in by private companies, and the cost-effective ticketing system of the government are blended, and the consumer also gets benefitted from the same.

The OFT released a guideline for the block exemption order, which explains the concept of block exemptions, the need for a block exemption on public transport ticketing schemes, and its effect on competition. The guideline is exhaustive and provides necessary information for concerned groups to understand the order. Thus, the concept of block exemptions provides supplementary incentives to competitors to make technologically advanced products, thereby leading to better innovation and progress while also providing better product choices to the market.

Research and Development Agreements Block Exemption, 2022[9]: -

The Competition Act, 1998 (Research and Development Agreements Block Exemption), 2022 came into effect on January 1, 2023. The order came into force as the retained European Union Regulations were to be expired by 31st December 2022, following Brexit. The order largely retains the EU exemptions but has certain changes in it. These include: -

• In order to prevent dynamic competition, which is a scenario where firms invest heavily in R&D that may ultimately lead to their entry or expansion based on the likelihood of making profits, the parties must demonstrate at the time of entering into the agreement, that there are three or more competing R&D efforts comparable to the agreement of the parties.
• Moreover, the R&D effort must concentrate on the development of a new product or technology, that is same or substitutable for the new product or technology in the R&D agreement or must be part of an R&D cluster pursuing an objective that is similar to the aim that would be covered by the R&D agreement.

It is to be seen as to how effective this customization would be, as it adds a field of complexity, i.e., how would firms demonstrate that there could be competing R&D efforts, when R&D is usually confidential.

Landmark Judgements on Block Exemption Regulations: -

Auto 24 SARL v. Jaguar Land Rover France SAS (Case C-158/11, Court of Justice of the European Union)[10]

This is an interesting judgement in which the question of law pertains to the interpretation of the term ‘specified criteria’ under Article 1(1)(f) of Regulation No 1400/2002, which is about the application of Article 81(3) of the Treaty of Rome to concerted practices and vertical agreements in the motor vehicle sector. The dispute arose when Jaguar Land Rover denied authorized distributor rights to Auto 24 due to a numerus clausus drawn up by Jaguar Land Rover. However, another authorized distributor opened an outlet near the place where Auto 24 was supposed to open their outlet.

The Court held that the term ‘specified criteria’, with reference to a quantitative selective distribution system, which is defined in the Regulation, refers to criteria the precise content of which is verifiable. The Court also held that it is not necessary for such distribution systems to be based upon criteria which are objectively justifiable and applied uniformly and in a non-differentiable manner with respect to all applicants who would want to benefit from such block exemption.

Stergios Delimitis v. Henninger Brãu AG[11] (Case C – 234/89, Court of Justice of the European Union)

The instant case pertains to a beer-supply agreement between Mr. Delimitis and the brewery Henninger Brau. Under the contract, Mr. Delimitis, a café operator, undertook to purchase a minimum quantity of beer and non-alcoholic beverages from subsidiaries of the brewery. The contract, interestingly, allowed the operator to purchase beer and non-alcoholic beverages from other Member States of the European Union as well. When Mr. Delimitis terminated the contract, the brewery considered that he still owed them money for the purchase of the minimum quantity of beer and deducted the same from a deposit made by Mr Delimitis. Aggrieved, Mr. Delimitis approached the court arguing that the contract violated Article 85(2) of the Treaty of Rome.

The Court held that in order to prohibit a beer supply agreement under Article 85(1), two conditions must be satisfied. Firstly, market access to beer distribution, in the context of sale and consumption, must be difficult for competitors who might try to establish themselves or enlarge their market share. Secondly, the agreement must be obstructive, when looked at contracts as a whole in their economic and legal context. The agreement’s obstructiveness depends on the duration of the agreement and the parties’ position in the relevant market. The Court also held that a beer-supply agreement permitting a reseller to purchase beer from other Member States is not liable to affect trade, as long as there is a real possibility that a foreign supplier will supply the reseller with beers from other Member States.

Conclusion: -

The concept of exemption from certain provisions of law, monitored by authorities to ensure that such exemption is not misused, is a unique mechanism to facilitate the growth of research and development in various fields. Currently in India, Section 3(3)[12] of the Competition Act, 2002 holds horizontal agreements as per se void. However, the Act provides for an exception to joint venture agreements, which help in improving efficiency in the supply of goods or provision of services. However, such joint venture agreements must not cause an appreciable adverse effect on competition. This can be considered a very primitive condition, as it does not consider the level of innovation that could reach the market, and it restricts business entities from collaborating to disrupt the market with a new piece of innovation. Moreover, such conditions would lead to little access to better product choices in the market. As India is moving towards self – sufficiency through the Azadi Ka Amrit Mahotsav scheme, conferring business entities with relaxation from Section 3(3) would promote or entail novelty.  But the legislative intent behind Section 3(3) is to prevent businesses from distorting competition through agreements that exclude competitors or causing entry or price barriers. The government wants to ensure that in the name of innovation, businesses will not distort competition in the marketplace. This protective approach of the Competition Commission of India towards horizontal agreements would need to be revisited. It would be beneficial to consumers if exempt agreements and block exemptions are implemented in India.

[1] Competition Act, 1998, §4

[2] Competition Act, 1998, §9

[3] Competition Act, 1998, §5

[4] EEC Treaty or Treaty of Rome: Treaty Establishing the European Economic Community, 25 March 1957, 298 U.N.T.S. 3, 4 Eur. Y.B. 412, art. 85(3)

[5] Competition Act, 1998, §6

[6] Competition Act, 1998, §7

[7] Competition Act, 1998, §8

[8] Public Transport Ticketing Schemes Block Exemption Order 2001, Sl 2001/329

[9] Competition Act 1998 (Research and Development Agreements Block Exemption) Order 2022, Sl 2022/1271

[10] Auto 24 SARL v Jaguar Land Rover France SAS, (Case C-158/11); [2012] WLR (D) 175

[11]Stergios Delimitis v. Henninger Brãu AG, [1991] ECR I-935

[12] Competition Act, 2002, §3(3)